Brookfield Property Partners (NASDAQ: BPY) and its affiliated real estate investment trust (REIT) Brookfield Property REIT (NASDAQ: BPYU) have a dilemma. They own some of the most iconic office buildings in the world and some of America's best shopping malls. While both real estate sectors are currently facing headwinds from the COVID-19 outbreak, Brookfield believes it has a bright future. Most private institutional investors tend to agree with Brookfield, which is why high-quality property values have held up reasonably well.
Unfortunately, public market investors aren't on board with this thesis, which has weighed on the value of Brookfield's stock. That led its parent, Brookfield Asset Management (NYSE: BAM), to offer to acquire the rest of Brookfield Property that it doesn't already own. That proposal leaves investors wondering whether Brookfield Property is worth buying ahead of a potential deal. Here's the case for and against buying the global real estate giant these days.
The case for buying Brookfield Property
In early January, Brookfield Asset Management offered to acquire all the shares of Brookfield Property that it didn't currently own for $16.50 a piece. The proposal would give existing investors a choice of accepting all-cash 0.40 shares of Brookfield Asset Management, or 0.66 Brookfield Property preferred shares for each share of Brookfield Property they currently own. Brookfield Asset Management structured that offer to appeal to all types of investors. Those who wanted to cash out could do so. Meanwhile, investors who desire further upside potential could accept Brookfield's shares. Finally, those seeking income could opt for the preferred equity.
Brookfield Property is currently reviewing the proposal. It could accept the current deal structure, negotiate a better offer, or reject the bid and remain public. The most likely outcome is agreeing to slightly better terms with Brookfield Asset Management. Investors clearly want more, considering that Brookfield Property's stock currently trades at around $17.25 a share, implying they expect a higher offer. Further, management has repeatedly stated they believe the stock is significantly undervalued. On the other hand, it doesn't have much leverage considering that Brookfield Asset Management owns a majority stake. Thus, a deal seems likely at a slightly higher valuation.
That might not be a bad outcome for investors who buy ahead of a potential deal if they accept shares in Brookfield Asset Management. The company, which manages and invests in private equity funds and companies focused on real estate, renewable power, and infrastructure, has significant upside potential. The company ended the year with a business valued at $66 a share. Meanwhile, it believes it can grow its business's underlying value to $110 a share by 2025. With the stock currently trading at less than $42 apiece, it looks highly undervalued.
The case against buying Brookfield Property
There's a lot of uncertainty facing Brookfield Property these days. While it seems likely to reach a deal with Brookfield Asset Management at a higher value, they might not come to terms. If that happens, the stock will probably decline sharply, especially given the headwinds facing its office and real estate segments. The company might have to suspend or reduce its 7.7%-yielding dividend to conserve cash until market conditions improve. While a stand-alone Brookfield Property could create long-term shareholder value, it faces an uphill battle given the current market conditions and the likelihood that scuttling a potential deal would sour its relationship with its parent.
Meanwhile, even if they agree to a deal, investors likely won't be able to convert all their shares into Brookfield Asset Management because of proration. Brookfield only wants to issue a maximum of 59.5 million of its shares, 42% of the total value offered. Because of that, investors will likely receive some cash and preferred stock in the deal, reducing their upside potential. However, they could sell the preferred stock and use the combined cash proceeds to buy more Brookfield shares to fully participate in its upside potential.
Better to buy the sure thing
While Brookfield Property owns a valuable portfolio of commercial real estate, there's too much uncertainty about its future to buy it right now, given the possibility of a deal with Brookfield Asset Management. While that transaction offers upside potential in Brookfield Asset Management's stock, the merger could fall apart. Because of that, investors seem to be better off considering buying Brookfield Asset Management directly than buying its real estate affiliates right now.